EMA Financial, LLC v. nFUSZ, Inc.

Background

EMA Financial, LLC lent nFUSZ, Inc. money in two December 2017 and January 2018 transactions. Each transaction included a note convertible into nFUSZ common stock and a warrant giving EMA an option to buy shares at a fixed exercise price. nFUSZ repaid both notes in full without transferring stock.

The December Warrant Agreement permitted a cashless exercise when nFUSZ had not registered its stock for resale. EMA sent a March 28, 2018 notice exercising 500,000 December warrant shares. Applying the formula as written, EMA calculated that it was entitled to 7,272,727 shares. nFUSZ argued that the formula contained an obvious error and that the denominator should be the market price rather than the exercise price. Under nFUSZ’s proposed calculation, EMA would receive 467,836 shares.

EMA sued for breach of contract and related relief. In a prior ruling, the court dismissed nFUSZ’s usury defense, denied EMA’s request for a declaration that its original calculation was correct, and reformed the cashless-exercise formula to use the interpretation advanced by nFUSZ. Under that reformed formula, the March exercise notice entitled EMA to 467,836 shares.

EMA’s Summary-Judgment Motion

EMA sought summary judgment on two damages theories: damages for nFUSZ’s failure to deliver the shares covered by the March exercise notice, and damages for an alleged repudiation—an advance refusal to perform—of the December and January Warrant Agreements. EMA also sought prejudgment interest under Nevada law.

The court ruled that the communications between the parties before the lawsuit were admissible. They were business communications attempting to resolve a dispute, not compromise negotiations excluded by Federal Rule of Evidence 408. The court also stated that, even if the communications had involved a compromise, they could be considered for another purpose: defending against EMA’s repudiation claim.

As to the March exercise notice, the court rejected nFUSZ’s argument that the notice was invalid because it relied on the erroneous formula. The notice itself did not state the formula or the number of shares due; it referred to the formula in the warrant. Because the court had reformed that formula, the notice referred to the proper formula. The court also rejected nFUSZ’s argument that EMA failed to account for payment, explaining that checking the cashless-exercise box represented payment through the formula’s deduction of the required warrant shares.

The court held that EMA was entitled to damages reflecting the value of 467,836 shares. It concluded that the applicable holding period began when the December Warrant Agreement was issued on December 5, 2017, and that the shares would be free trading on June 6, 2018. Because EMA accepted June 6 as the valuation date to avoid trial, the damages calculation was to use the June 6 stock price, which the court identified as $12.495 per share before accounting for the reverse stock split. The court also held that EMA was entitled to prejudgment interest beginning April 3, 2018, the date nFUSZ should have delivered the shares.

The court denied summary judgment on EMA’s broader repudiation theory. First, it concluded that EMA had not pleaded a claim that nFUSZ repudiated both warrant agreements. The complaint alleged only that nFUSZ failed to deliver shares under the March exercise notice. Second, the court concluded that the record did not show that nFUSZ had made a definite and unequivocal decision not to perform the agreements. The prelitigation communications showed that nFUSZ repeatedly offered to deliver the number of shares calculated under its interpretation of the formula. EMA also had not shown that it was ready, willing, and able to submit additional exercise notices for the remaining warrant shares.

nFUSZ’s Motion to Amend

nFUSZ sought leave to add a counterclaim under Section 29(b) of the Securities Exchange Act of 1934, seeking rescission—cancellation—of the agreements based on alleged violations of the Act’s broker-dealer registration provisions. nFUSZ relied primarily on a 2019 federal district court decision and two Securities and Exchange Commission enforcement actions, arguing that these authorities supported treating EMA as a dealer that should have registered.

Because the proposed amendment came after the scheduling-order deadline, the court applied Federal Rule of Civil Procedure 16(b), which requires good cause to modify the schedule, in addition to Rule 15(a). The court found that nFUSZ had delayed unduly. It waited more than three months after the decision on which it primarily relied before informing the court that it intended to amend, and it waited until after the court ruled on the parties’ pending summary-judgment motions.

The court also held that the cited decision did not constitute new law. In the court’s view, that decision surveyed existing statutes, cases, and Securities and Exchange Commission guidance rather than changing the law. Because nFUSZ had not shown good cause, the court denied the motion to amend and did not decide the merits of the proposed counterclaim. The court stated that it had serious doubts about the proposed counterclaim, including whether the agreements required EMA to register as a broker and whether nFUSZ had suffered harm, but those issues were not necessary to the ruling.

Disposition

Judge Naomi Reice Buchwald ordered that EMA’s motion for summary judgment was granted in part and denied in part: it was granted as to damages for the March exercise notice shares and denied as to the alleged repudiation of the warrant agreements. nFUSZ’s motion to amend its answer and counterclaims was denied. EMA was directed to submit a proposed judgment and supporting calculation, and nFUSZ was allowed to dispute the calculations by affidavit.